Friday, February 18, 2011

Bridging Cross Cutting Cleavages, Horizontal and Vertical Links

I plan for this to be my last post on this subject, it has already gone on far longer than I had intended it to do.

The first issue is another driving factor behind the increasing community of interests that elites have. That is the 1980s tax reform which substantially simplified our tax policy. While in general I support this reform (capital gains being taxed at a lower rate excepted) this reform inadvertently eliminated many of the issues that previously created divisions within the broader group of the wealthy. With the earlier tax code, a wide variety of loopholes existed which created incentives for the wealthy to protect the loopholes they used, while regarding others as expendable. The simplified tax code eliminated these divisions, creating a greater community of interest. Again, I like tax simplification and think it is worth it, but since I also like for people in a democracy to be divided so no one group can win out, I think it's worth noting that there's a potential cost to simplification.

On to the main topic, which is the linkages between groups. The main point is that there are very strong horizontal issues that unite the wealthy and distinguish them from the rest of us. The biggest one being the focus on investment income rather wage income. This presents a unified front and the group is manageable enough to keep up a coherent message. Below this level, despite the relatively low earnings from capital gains, we are simply to diverse to match this lobby.

These leads naturally into some of the vertical linkages that still exist. Corporations themselves are an important vertical link between the wealthy and the rest of us. This gives many of them a way to identify their interests with those of all of us, after all, if your employer is doing well it's more likely you'll do well. However, the way that income is earned at the top has caused this linkage which involves shared interests across most sectors of society (the bottom quintile doesn't have much say here) to weaken relative to the horizontal linkages amongst the wealthy. Despite this, this vertical linkage inherent in the corporation provides the wealthy with a platform to make their own views heard potentially in virtually every electoral district in the US. It also allows them to speak for an entire group of people, rather than having to speak solely for themselves, even when they are advancing their narrow interests rather than the interests of the company as a whole. If it were truly corporations advocating rather than their wealthy owner, our corporate taxes would be rock bottom and our capital gains and income taxes wouldn't have changed so much.

My evidence for this is a bit weak, but something that always nags at me when looking at US policy is how effective mobilization has been among the wealthy over the past 30 years in lowering the top income brackets as well as the capital gains rate while simultaneously being abjectly horrible at lowering the corporate tax rate, whose base level is well above OECD averages.

This really lies at the root of my thinking on this issue. Policy changes instituted in the 80s led to a great strengthening of interests that united the upper end of our income bracket while not materially effecting interests or incentives for the rest of society to become more unified. Over time, these changes have played a self-reinforcing role, as the wealthy adapt their existing portfolios to match with the new set of incentives their rewards for going along with the interests of the rest of the wealthy increase, while their incentives for focusing on the vertical linkages with the rest of society decrease. Today's wealthy are far more diversified and have a much more international outlook than previous generations, they simply aren't as tightly tied to the individual businesses that unite their interests with the rest of society's. Since corporate taxes continue to vary greatly between industries, the owners of businesses have widely varying incentives in pressuring for changes in these taxes, while their incentives for lowering the income and capital gains taxes are similar. So, given the choice, they'll accept the continuation of high corporate taxes, but rising capital gains or personal income taxes are something worth fighting with all their might.

This isn't to say that there don't remain a number of vertical linkages, but most of these are a side show rather than something fundamental to our success as a society. The NRA would be a great example of this kind of vertical link, while it may advantage a few particular wealthy interests it is a link between them and the rest of society, however, it's not exactly advocating on issues that will make or break the future success of our society.

It may also be that the internet will eventually allow the creation of horizontally linked groups among the non-wealthy that can successfully apply counter pressure. The Tea Party could be a forerunner of this, though it is arguably if the pressure they are applying could be called counter pressure. It remains to be seen however if this pressure will be a long term thing or simply a temporary response to current conditions. The policy changes that have altered incentives at the top have led to constant pressure, and the formation of a number of long lived formal entities, such as think tanks. To properly counter this it would be necessary for citizen groups to form that would have a similar longevity and ability to get out the vote and to apply pressure to individual Congresspeople year in and year out. I'm sceptical this will happen, though hopeful it will.

[Edit: I will do one more very short post, probably a paragraph or two at most, on this subject that I forgot to include in this post that I think is very relevant for addressing how divergent interests can easily lead to regulatory arbitrage among the states.]